TCS Daily

FCC, Let It Be

By James K. Glassman - January 14, 2003 12:00 AM

A report released Monday reveals just why the regional Bell monopolies are so frantic about getting FCC Chairman Michael Powell to change the rules and cut off competition for local telephone service.

The report shows that at the end of 2002, the Bells' competitors had won customers for an estimated 10 million residential and small business lines - thanks to UNE-P, an acronym that stands for "unbundled network element platform."

UNE-P, a critical ingredient in the plan for deregulation laid out by Congress and the White House in the Telecommunications Act of 1996, is bringing Americans lower prices and better service.

The law allowed the Bells into long distance if they opened their local networks to competitors. A requirement that they rent parts of their system - built with subsidies and protected by government for a century - was an essential part of the deal.

The law says that the Bells have "[t]he duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, nondiscriminatory access to network elements on an unbundled basis at any technical feasible point on rates, terms and conditions that are just reasonable and nondiscriminatory" [Sect. 251 (c) (3)].

UNE-P rates, set by state commissions, are certainly just and reasonable. But they do mean more competition at the local level for the powerful Bells. They have screamed bloody murder.

Now, with the Bells cleared to sell long distance in 35 states, Powell has indicated that he wants the FCC to end the requirement that they lease parts of their system. He wants to scrap a model that is clearly working.

Using data from filings by the Bells and statements released to investors, PACE found that UNE-P lines have grown from 489,000 at the end of 1999 to 2.8 million in December 2000 to 5.8 million in December 2001 to 8.8 million at the end of September 2002 and to an estimated 10,020,000 last month. That's annual growth for 2002 of better than 70 percent.

Despite this robust growth, total UNE-P penetration is still only about 7 percent of the Bells' lines, for both business and residential customers.

In some states, UNE-P gains have been especially impressive. Using data from June, PACE found that there were 751,000 UNE-P lines in Michigan, a 14 percent market share of all lines; 428,000 lines in Florida, a 6 percent share; 327,000 in Georgia, for 8 percent; 126,000 in Kansas, 9 percent; and 424,000 in Illinois, 6 percent.

The report found that huge initial gains in the top two states - New York, with 1.8 million UNE-P lines (17 percent), and Texas, with 1.3 million (14 percent) - were leveling off.

The increased competition has brought significantly lower rates in states like New York, Michigan and Illinois. But the report also reveals that in many states - including Connecticut, Maryland, Nevada, Nebraska, Utah, Virginia, Arizona, New Mexico and California - there was very little UNE-P activity. As a result, consumers are being deprived of lower prices and better service.

Why is Powell indicating he wants to kill a system that seems at last, after years of footdragging, to be working for the benefit of consumers?

In the past, Powell has backed the states' role in the process, but now he wants to pre-empt them. He has said he prefers "facilities-based" competition over leasing. As he wrote last week in the Financial Times: "The FCC must provide a regulatory framework that promotes facilities-based competition - where companies use their own equipment rather than leasing it from a competitor."

But the whole point of leasing is that it will lead to facilities-based competition, probably within a short time. That's what happened with long distance, which was deregulated along the same model. First, competitors like MCI and Sprint leased lines from AT&T; then, after acquiring a customer base, they built their own systems.

An article Sunday in the Miami Herald points out that the "current wreckage in the telecom industry" is testimony to the failed strategy of "building networks, not booking customers." Wrote reporter Beatrice E. Garcia: "A painful lesson was learned: A customer base is critical to support the costs of a network."

The Washington Post reported, also Sunday, that "competitors [to the Bells] say it's unreasonable to expect them to build a parallel network immediately - just as competitors to the old AT&T were not required to do so when they entered the market - and because Congress said so."

One obstacle that stands in the way of the grandiose plans of the Bells and Powell is the little matter of what the Telecom Act of 1996 actually says.

It could not be more clear. The Bells have to lease unbundled elements at reasonable rates. What's reasonable? The states seem to have a good idea.

Anyway, if UNE-P rates are ridiculously low, why don't the Bells themselves take advantage of them? Current rules allow Qwest, for example, to compete with SBC in the Midwest or with Verizon in New Jersey. Why not? Perhaps the Bells like carving up the U.S. territory like any cartel. Or perhaps they are afraid to compete because UNE-P rates really aren't that low.

If Powell does attempt to usurp congressional power, it's almost certain he will meet resistance in the courts and on Capitol Hill. The Bush administration has tried to stay out of the issue, but, as with its recent intervention in questions involving the Securities and Exchange Commission, it can hardly sit by while consumers are badly hurt. The White House will take the blame, so it might as well wield some responsibility.

A report in the Wall Street Journal last Monday that said that Powell would move to scrap UNE-P sent shares of the Bells soaring, but within a week, Verizon, SBC Communications and BellSouth were all back where they started before the article. "I think the market's sort of jumping the gun a little bit," said analyst F. Dark Johnstone of Davenport & Co., quoted in a follow-up by Dow Jones News Service to the initial Journal report. Analysts pointed to likely litigation and the fact that Powell is not certain to have the votes he needs. Johnstone also pointed out that the states "are likely to battle the FCC tooth and nail."

Absolutely. And for good reason.

A recent editorial in Crain's Chicago Business explained the situation well: "Powell seems to think the way to stimulate competition in the local telephone business is to eliminate the competitors that have just begun to challenge regional Bell companies.... The Bells have been marshaling their forces for a lobbying assault on the newly emboldened state regulators. But they apparently won't need to now that they've found a more sympathetic ear in Powell. He buys their argument that the incipient competition is somehow 'false.' They contend that 'real' competition will come only when rivals build their own local service networks.

"The problem with that theory is that nobody in the moribund telecom industry can afford the hundreds of billions it would take to replicate networks built by the Bells (and their Ma) over generations and paid for by customers required to pay phone rates that ensured the Bells a profit on every dime they spent on their systems.

"Ironically, Powell's plan is the surest way to bring the phone business back to its monopolistic roots..... A good outcome for the Bells; a bad one for everybody else."

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